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please anyone can explain the labour point in ch 8 example 1 from opentuition notes….???how come 90,000??
There are two ways of explaining it. I will explain what I think is the most logical way, but if you do not understand then ask and I will explain it another way!!
The labour is being paid whether we do the contract or not, and so there is no extra cost there.
However, if we ‘steal’ the labour from their current work, then we lose the current revenue they would have earned, which is $150,000.BUT, if they are not making the current product, then we do not need to pay for the materials and so we save the material cost of $60,000. (Prime cost is material plus labour, so material is 100,000 – 40,000 = 60,000).
So….the net cost of doing the contract is the lost revenue (150000) less the saving on materials ((60000) = $90,000.
(The overheads are not relevant since they are simply being absorbed (charged) differently – there is nothing to say that the total overheads for the company change)
Hope that helps 🙂
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